How to Trade U.S. Stocks After the Election? Citigroup's Six Major Themes Explained!

Wallstreetcn
2024.11.06 03:55
portai
I'm PortAI, I can summarize articles.

Citigroup believes that if Trump wins, the volatility of the NASDAQ may remain high; in terms of energy, the Republican Party is more likely to support fossil fuels, and the political sensitivity of photovoltaics is relatively high; deregulation is beneficial for fintech stocks and small biotechnology companies; inflation and deficits may rise, focusing on materials, luxury goods, and real estate stocks

The results of the U.S. election are imminent, and after the dust settles, how should U.S. stocks be traded? Citigroup analyzes the current situation of U.S. stocks across various sub-sectors.

In this week's latest report, Citigroup lists 20 charts and six major themes to analyze the current situation of U.S. stocks, including volatility, energy, deregulation, rising inflation/rates, trade/tariffs, and other themes (including taxes, efficiency, and immigration).

Citigroup states that in some cases, certain policy outcomes have been priced in more, while in other cases, politics may not have had much impact on price movements.

Here are the six major themes and analyses:

Volatility: Overall volatility is expected to decline, while Nasdaq volatility may remain high

Most expect a risk-off sentiment post-election, leading to a relative decline in the short-term VIX index; however, if there are contentious elections/riots, the VIX index may remain elevated for a longer period.

Small-cap/mid-cap stocks are relatively cheap "call options" on a Trump victory. During the Trump 1.0 era, small-cap/mid-cap stocks were seen as beneficiaries of America First policies. Given the greater focus on tariffs, they may be treated the same way again, and since large tech stocks seem to be less favored by Trump, in the case of a Trump victory or a Republican landslide, the high volatility level of the Nasdaq may persist compared to the Russell 2000 index.

Energy: Republicans support fossil fuels, while solar power has high political sensitivity

"Drill baby drill" (encouraging increased oil and gas drilling activities) may not be favorable for oil prices, and thus the margins and stock prices of exploration and production (E&P) or integrated oil may not benefit as much as those of service companies. If more land becomes available for drilling, oil prices may decline further. The recent strong performance of exploration and production companies has not yet been factored into the price narrative by the market.

The positions of red and blue (Republicans and Democrats) differ, with Republicans more likely to support fossil fuels and less likely to directly fund the green transition, such as new infrastructure like smart grids and energy storage (like batteries and fuel cells). Instead, their government spending is more likely to be directed towards old infrastructure, such as roads and bridges. Since May, the market has clearly preferred the latter.

Citigroup has categorized the political sensitivity of green energy, with water (represented by the NASDAQ OMX U.S. Water Index) being screened as having lower political sensitivity, while solar energy (represented by the MAC Global Solar Energy Index) is the opposite. Solar energy may require direct government support and regulatory push to improve long-term stock performance, while water is more driven by commercial demand and, if managed properly, can have a near-term bottom-line impact or risk reduction. Trump and the Republicans are seen as unfavorable to the former.

Deregulation: Positive for fintech stocks and biotechnology companies

Trump's deregulation is widely viewed as beneficial for financial institutions; however, improvements in the macro backdrop, including lower interest rates, reduced recession fears, and strong third-quarter performance, are key drivers of absolute returnsCitigroup is more focused on the differences between the performance of regional banks and central banks, with the former expected to gain greater momentum from looser rules and regulations.

If there is a Republican landslide or a Trump victory, a more favorable regulatory environment could boost smaller biotech companies, opening the door for mergers and acquisitions among large biotech/pharmaceutical companies. The market has not yet priced in this transaction, and the focus in the biotech sector remains on large-cap stocks, while a more open capital market would stimulate the performance of small-cap biotechs.

Relative performance of fintech has seen a sharp rise compared to traditional financial institutions. Deregulation may allow disruptive business models or new challengers to thrive within traditional institutions more easily. Additionally, some credit card companies also fit Citigroup's definition of fintech. In a more business-friendly context, antitrust concerns may also ease.

Inflation: Inflation, deficits, or rising, focus on materials, luxury goods, and real estate stocks

Citigroup points out that both candidates are unfavorable for the stock market, but Trump has a more negative impact on the long-term U.S. deficit. The relative trades in this section focus on the potential impacts of higher interest rates and inflation.

These two factors tend to influence the valuation side of the market: value (factor) and minimum volatility. Value includes many cyclical stocks that may gain momentum in a higher inflation environment, while they tend to be less sensitive to higher interest rates compared to minimum volatility stocks.

The next inflation trade focuses on the materials sector, particularly metal and mining companies, which benefit from commodity and inflation momentum, with metals and mining showing more significant gains than value stocks before the election.

Attention is drawn to the comparison between luxury goods consumption and discretionary consumer spending, ultimately hinging on potential interest rate impacts, followed by tax issues. Luxury and high-end consumers are typically not sensitive to interest rates, and this group tends to perform better than others in an environment of higher rates driven by increased Trump-era deficits. In contrast, Harris and the Democrats are more likely to raise taxes on high-income individuals. Admittedly, higher taxes may affect savings more than spending, but this remains a potential negative factor for market reactions.

In the housing market, attention is on the Dow Jones U.S. Home Construction Index, which includes builders and materials/components suppliers, as well as retailers. In the case of a Trump victory, higher interest rates are viewed as relatively negative from the financing perspective of most home purchases (including new and existing homes). In the case of a Harris victory, some of her policies would provide direct support for first-time homebuyers, which should benefit companies within the industry. Therefore, builders are highly sensitive to the policies of both parties.

Tariffs/Trade: Changes in tariff policies may affect technology and consumer stocks

In the case of a Trump victory, the impacts of tariffs and potential retaliatory actions are difficult to interpret, but the market will look for winners and losers early on after a Trump victory and seek relief in the event of a Harris victory.

Starting with the technology sector, attention is drawn to the comparison between software and services versus hardware. Physical goods are more easily taxed, and hardware is seen as a loser in comparison. Since May, software has been leading relatively, but the recent direction has become less clearIn terms of offshore trade, robotics technology/industrial technology is more concentrated in small-cap stocks, with a focus on U.S. operations.

In the consumer sector, attention is paid to the situation of physical goods relative to services. Consumer services may be more insulated from trade conflicts, while durable goods and commodities are not.

Citigroup's "Emerging Markets in Developed Markets" (EM in DM) theme focuses on companies with high exposure to non-U.S. sales, particularly in faster-growing emerging economies. Despite many companies being in more growth-oriented industries, these stocks have underperformed this year. However, with Harris winning, these stocks may experience a relief rally.

Taxes: Tax policy adjustments may impact financial, education, and pension stocks

In any case, there may be more aggressive taxation on financial assets, or if the Democrats can negotiate some tax increases to partially offset cuts in other income levels, it could create some headwinds.

In the education technology sector, there may be a "Musk effect" relative to broader consumer spending. If the government pushes for efficiency, significantly cuts the Department of Education's budget, and shifts more responsibility to states or even local governments to address, it could further drive the development of the education industry. Trump and Musk may prefer to let the free market solve efficiency issues in education and other institutions.

Additionally, Trump seems more likely than Harris to cut taxes, although both appear to be making concessions on various taxes during the campaign. Attention should be paid to Trump's proposal to eliminate the Social Security tax, which would boost the elderly population and companies providing goods and services to them. This year, consumer stocks targeting the elderly have already outperformed the broader consumer sector.

Finally, the relative trade is related to immigration policy, with Trump's stricter immigration policies compared to the Democrats potentially being a negative factor for urban population rebounds, and companies related to urbanization themes may become targets of this political outcome trade